The Impact of Exchange Rate on Private Sector Investments in Uganda

Abstract

The Ugandan shilling has slowly but surely lost value against the US dollar since liberalization of the foreign exchange market. For example, in 1990 one US dollar was valued at just 428.9 Ugandan shillings, however by 2017, 1 dollar was equivalent to 3240.6 Ugandan shillings. This continued depreciation of the shilling raises questions as whether it favors or disfavors investments in the economy, to be specific private investments. The study applied the ARDL approach to time series data from 1983 up to 2016 in order to examine the impact of exchange rate on private sector investments in Uganda. The results indicate that there is a negative relationship between the nominal exchange rate and private investments both in the short and long run. The rise in the exchange rate makes the Ugandan shilling weaker compared to the dollar implying that Ugandan private investors would need more Ugandan shillings to purchase one (1) dollar, hence discouraging investments considering the fact that most of the inputs and equipment necessary for production are imported. Results further revealed that factors like access to bank credit, government investments, and growth in GDP positively impact on the private investments, however, inflation was found to have a negative impact on private investments in the long run. Key Words: Exchange Rate, Private Sector Investments, ARDL